The real risks of virtual currency
Virtual (or digital) currencies like Bitcoin are being used as a type of money and offer a novel way to make purchases and transact business online. However, it remains unclear what virtual currency truly represents. Is it actually money? An investment? Something else? This is still a largely uncharted and unsupervised area, and no protections are likely available to you if you become involved with virtual currency and something goes wrong.
One certainty is that all virtual currencies should be approached with extra caution. Recent events, from software glitches, hackings and exchange shutdowns to cases of outright fraud, highlight the speculative and risky nature of virtual currency. As with any financial product, investors need to do their research, understand the hazards and know who they’re dealing with when it comes to owning and trading these electronic assets.
Virtual currency isn’t subject to traditional financial sector regulation. This may change as regulators consider and make new rules to oversee its use and activities related to it.
What virtual currency is…and isn’t
Unlike national currencies, the Canadian dollar being an example, virtual currency isn’t issued by central banks or government. Instead, it’s digitally created and stored via computer networks.
In exchange for national currencies, you can buy and sell virtual currency over the internet and, in the case of Bitcoin, even at physical locations that function much like ATMs. In spite of this, no virtual currency is considered legal tender today, nor are they required to be accepted as a form of payment. What that means is if no one agrees to receive a virtual currency in exchange for a good or service, it will become worthless.
Speculators have been drawn to trading virtual currency as a way to turn a quick profit. This is another risky scenario as virtual currency prices have been wildly volatile and next to impossible to forecast. Speculative trading carries significant risk and has caused many investors to lose money. Only speculate with money you can afford to part with.
Because of how virtual currencies are created and processed, the identity of the user behind a virtual currency address remains “anonymous.” This, together with the current lack of regulation, has made virtual currency attractive for use in illegal activity, including money laundering, drug dealing, terrorist financing and fraud. This February, the Federal government announced in its budget that it will impose anti-money laundering and anti-terrorist financing regulations on virtual currency.
No matter the investment, ask questions and don’t invest unless you understand the product, the risks and the costs.
Fraudsters have latched onto virtual currency as a way to show they’re on the cutting edge and to entice unsuspecting investors to get in “on the ground floor,” a tried-and-true technique. Some have already set up Ponzi and other illegal schemes using virtual currency to lure investors.
Indeed, the medium may be new but the methods scammers use to separate you from your hard-earned savings are age old. No matter the investment – virtual or otherwise – ask questions about it and be aware of the red flags of fraud, including guarantees of high returns with no risk, high-pressure sales tactics and unsolicited phone calls and e-mails from people you don’t know claiming to have a “hot tip” to share.
The OSC is closely monitoring investment activity related to virtual currency and we’ll take action where violations of the Ontario Securities Act are concerned.
Remember that investment fraud can happen to anyone, even the financially savvy. If you think you’ve been the victim of a fraud, please let us know. Our Inquiries & Contact Centre is available by phone at 1-877-785-1555 or by e-mail at email@example.com.
Learn more about virtual currency and its pitfalls with these additional resources:
Investor Education Fund
Autorité des marchés financiers
February 5, 2014
Financial Industry Regulatory Authority (U.S.)
March 11, 2014
February 15, 2014
To help you guard against fraud
Our fraud brochures are available online 24/7. Click on the links below or visit us at www.osc.gov.on.ca to download your copy.